VCPE interest in India, China more guarded now

During my recent trip (Feb 2011) to Europe I spent some time with several investors, limited partners (LPs) and analysts who monitor fund flows into venture capital and private equity funds in Asia, Europe and the US. I was intrigued to learn that investors are suddenly more guarded in their enthusiasm about Asia while interest in the US and Europe is returning.

On an aggregate basis LPs continue to have an appetite for India and China as they seek GDP and consumption led growth but their concerns are growing.

On China, they are overweight relative to traditional allocations, but with some trepidation as the specter of inflation and exchange rate policy changes looms. Even more worrying is the rise of domestic (RMB) funds which could disturb the level playing field.

On India, they are slightly underweight relative to recommended allocations. There is continuing concern about governance, currency and inflation issues. However, the one solid aspect of investing in India has been backing investment teams with long histories of working together and delivering results. That has changed recently: the breakaway funds launched by some heavyweights (Ajay Relan left CVCI, Renuka Ramnath left ICICI-Ventures, Rajesh Khanna left Warburg Pincus, just to name a few) have caused more concern than the geo-politico-economic factors that previously bothered investors; I heard this lament even before news of the recent Sequoia decapitation broke last week.

Europe and US are looking up as the public markets have bounced back and VCs/PEs have seen some exits recently.

Sector focused funds seem to be slightly out of favor: recall the frenzy for cleantech funds of recent vintage? Not so much fun anymore.

Team, strategy, stage, and geography (in that order) seem to be priorities that indicate a return to basics.